Online Currency Exchanges Hide Traces Of Money As It Moves

If Al Capone were alive today, this is how he would be hiding his money. Those words yesterday from the head of the criminal investigation division at the IRS. He was talking about Liberty Reserve, an online currency exchange now accused of operating a $6 billion money-laundering operation. It's believed to be the largest online money-laundering case in history.

According to prosecutors, Liberty Reserve was a financial hub for online criminal activity ranging from computer hacking to child pornography to narcotics trafficking. So, how did this online currency exchange work?

We're joined by Kara Scannell, U.S. regulatory correspondent with the Financial Times to explain. Welcome to the program.

KARA SCANNELL: Thanks for having me.

BLOCK: And, Kara, let's follow the money. If I wanted to create an account at Liberty Reserve, what do I have to do?

SCANNELL: Well, it's fairly simple. You just have to fill out an online form where you put in your first name, your last name, an address and an email address. And you have an account set up just as easy as that. In fact, as part of this investigation, an undercover law enforcement official did open an account using the name Joe Bogus with the account name To Steal Everything. And he made up his address as 123 Fake Main Street, Completely Made Up City, New York.

BLOCK: And somehow that didn't tip the folks at Liberty Reserve off...

(LAUGHTER)

BLOCK: ...to something that might be afoot.

SCANNELL: Well, that's the issue in this case is that in these online virtual currency businesses, they don't verify or validate - or at least Liberty Reserve didn't verify or validate - any of the information of its customers. And that's how people were able to use the anonymity in order to launder what is alleged to be $6 billion.

BLOCK: OK. Well, let's say I have this Liberty Reserve account set up and I want to put real money into it, real dollars into it, what do I have to do?

SCANNELL: Well, in the case of Liberty Reserve, they operated using these, quote, "third party exchangers" that would serve as the middleman between the account that you might have at a bank where the money is and Liberty Reserve. So it sort of acts as a buffer and it cuts down on the actual paper trail that leads back to you, specifically, and your transactions.

So if you put your money in a Western Union account, transferred it to this exchange company, they would then translate your actual dollars into LR, the virtual currency, and then transfer that to Liberty Reserve.

BLOCK: So I have money that's now LR, this virtual currency at Liberty Reserve. And what does that allow me to do? Is it purely the anonymity, the lack of being able to be traced that's the advantage there?

SCANNELL: Yeah, that seems to be the main advantage because if you're dealing with money that's obtained illegally - whether it's through drug trafficking or cyber hacking - then you don't want it to be traced back to your actual self. So it allows people to, quote, "clean the money" and then pull it out or distribute it to other people that they need to pay, using this virtual currency that is then translated once again from an LR, through the exchange companies, into actual cash.

BLOCK: So one thing you could do would be to transfer money among accounts that Liberty Reserve held, right? So if there were another criminal activity that you were doing business with, you could trade money on this exchange and no one would know.

SCANNELL: That's right.

BLOCK: Let me ask you this, Kara. You cover the regulatory world, are there regulations that govern this new world of online currency exchanges? Or is this pretty much the Wild West?

SCANNELL: Online currency exchanges have been around for about 10 years or so, from people I've spoken with. I think more recently - earlier this year, in fact - the Treasury Department issued a notice to banks and financial institutions and these virtual currency exchange operators to say that if you are going to do business you do have to have certain - you do have to register with the U.S. and you do have to follow by U.S. rules if you're going to have any accounts in the U.S. that are involving U.S. citizens.

And some of those requirements are this know your customer rule, so it puts these exchanges on the hook if they're in fact engaging with terrorist financing or drug trafficking.

BLOCK: I've been talking with Kara Scannell, U.S. regulatory correspondent with the Financial Times, about the online currency exchange Liberty Reserve.

Kara, thanks so much.

SCANNELL: Thank you for having me. Transcript provided by NPR, Copyright NPR.